Dollar Bowed by Month-End Pressure

The US dollar is trading heavily against the major currencies, though remains mostly firmer against most emerging market currencies. Real material developments have been light and it appears that position squaring, some of which appears related to position adjustments. The month has been characterized by a sharp backing of interest rates, led by the tapering talk in the US and the volatility of the Japanese government bonds. To the extent that shifting expectations of the trajectory of monetary policy has been a supportive factor for the dollar, that remains intact, as the premium the US offers over Japan and Germany is as large as it has been in recent weeks. The 5% decline in the Nikkei, sufficient to wipe out the remaining gains of the month helped steady the bond market. The US-Japanese 10-year interest rate differential is just above 120 bp, a level only seen a few times since the BOJ's strategy was announced in early April. The dollar has slipped, nonetheless, to its lowest level against the yen since May 9 and has spent the entire session thus far below the 20-day moving average, which comes in near JPY101.35. The last leg up in the dollar began in early April and it held a trend line drawn off the lows, but now is convincingly through it. It is found near JPY101.10 today. A close above it, of course, would help lift the technical tone. On the downside, the JPY99.50-JPY100.00 area appears to offer strong support. The US 10-year premium over Germany is 3 bp greater today and above 60 bp, which is the upper end of where it has been in three years. The pick up in the Sentix sentiment surveys appears to have encouraged at least one investment house to downplay the risks of a rate cut by the ECB next week. Nevertheless, we see the euro's rise as largely technical in nature. We had anticipated that the base near $1.28 would hold and off the near re-test yesterday it has briefly poked through the $1.30 level. The euro is moving above its 20-day moving average, which caught last week's high. It has not closed the North American session above the 20-day moving average since May 8. It is found near $1.2960 today. A trend line drawn off the month's highs as well as retracement objectives are found between $1.3040 and $1.3060. Sterling has gone along for the ride, though the tick up in Nationwide house price index (1.1% year-over-year, fastest pace in 18 months) did not hurt. Sterling bears got trapped after horrible CBI trends survey did not provide enough incentive to push cable below the $1.50 level yesterday. The base there is comparable to the $1.28 level in the euro. Off that base, short-covering has lifted sterling to $1.5200. The 20-day moving average is a more more distant $1.5260, just beyond a retracement objective near $1.5230. The fact that the Australian dollar has ticked higher may also be reflective of the broader corrective forces here at month end. It reported a sharp 4.7% decline in Q1 capex. The consensus was for a 0.8% rise. Many observers warned that a poor report would send the Aussie tumbling. It didn't. In fact, it did not take out yesterday's 20-month low. In hindsight, and in the face of the firmer currency, observers say the poor capex figure was offset in full and more by the 9.1% jump in building approvals, which was indeed twice the consensus. That said, the risk of another rate cut next week was never very high and the OIS implication is that there perceived to be about a 1 in 8 chance or so. Resistance is seen in the $0.9700-30 area. Separately, we note that the RBNZ revealed that it sold another NZ$256 mln in intervention, the most since May 2008. The kiwi has under-performed marginally today. Nevertheless, we doubt the efficacy of RBNZ intervention. The sales are a drop of water in the ocean. Consider that average daily volume is more than 30 bln, which means the intervention is less than 1%. Moreover, it does not signal a change in monetary policy. The RBNZ still makes hawkish noises and the intervention was likely sterilized to neutralize its effect on domestic monetary aggregates.